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Global Shocks and Unemployment Adjustment

  • Ron Smith
  • Gylfi Zoega

    (Department of Economics, Mathematics & Statistics, Birkbeck)

The literature on unemployment dynamics is mainly concerned with the nature and impact of shocks to unemployment. In this paper we use OECD unemployment data to infer the nature of these shocks using factor analysis. We find that two Principal Components can account for a large part of the variance of unemployment between and within countries. We then use regression analysis in which equilibrium unemployment depends on a global shock and domestic labour market institutions, and the institutions also determine the response to global shocks and the speed of convergence to equilibrium. We find that national unemployment series do converge to a moving equilibrium and that the responsiveness of shocks and the speed of convergence to equilibrium also change over time as domestic labour market institutions change. The calculation of the Principal Component is suggestive of the possible economic causes of long swings in unemployment.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0401.pdf
File Function: First version, 2004
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0401.

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Length: 33 pages
Date of creation: May 2004
Handle: RePEc:bbk:bbkefp:0401
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